HONG KONG, March 5 (Reuters) - China’s insurance regulator is considering an industry shake-up that could see the biggest and most solvent firms resuming an overseas expansion, while smaller, riskier insurers would come under tighter scrutiny.

The plan being discussed would see the China Insurance Regulatory Commission (CIRC) move from a one-size-fits-all regulatory framework to a regime calibrated to insurers’ assets, solvency ratios and risk tolerance, four people with knowledge of the talks told Reuters.

It forms part of a broader push by the CIRC to clean up the world’s second-largest insurance sector amid concern that rampant expansion by many smaller firms has caused rising systemic risk in the financial sector.

Chinese insurers have snapped up billions of dollars worth of assets overseas and at home in the past two years to counter falling investment yields at home. Many have funded their expansion with cash from selling opaque investment-linked wealth management products, increasing companies’ balance sheet risk.

Outbound M&A deal volume by Chinese insurers doubled last year to $11 billion, after growing at a similar pace in 2015, according to Thomson Reuters data.

But concern over the balance sheet risk, and a crackdown on capital outflows, has made it tougher for insurers to win government approval to deploy fresh capital abroad over the past six months, causing uncertainty about their ability to do more outbound deals.

Several larger insurers have lobbied the regulator to take a more tailored approach when applying the rules, arguing they should not be subject to the same investment restrictions as their smaller, riskier rivals, two of the sources said.

Ongoing M&A deals with potential Chinese bidders include Australia and New Zealand Banking Group’s sale of its more than $3 billion life insurance and wealth business, investment bankers say, and Chinese insurers have also shown interest in buying Hong Kong Life Insurance Ltd, one of few independent life insurers in the financial centre, which could fetch $600 million.

Chinese insurers have also been looking to buy hotels and other real estate assets from New York to London to find steady and higher yields.

INVESTMENT CAP

Under the new regime being discussed, the CIRC plans to look more favourably on large, solvent insurers including China Life Insurance Co Ltd and Ping An Insurance Group Co and support their expansion plans, both at home and abroad, the people said.

Smaller insurers will face tougher scrutiny when trying to expand overseas or domestically.

“The insurance companies have to increase their investment yields, and there are some that are considering using assets to do offshore M&A,” said Martin Tam, an insurance partner at law firm Baker McKenzie in Hong Kong.

“But it will depend on the requisite regulatory approvals which, in turn, will depend on the companies – how strong are their solvency ratios and if those investments are prudent.”

The proposal is in its early stages and it’s not clear when it might be implemented, said the sources, who declined to be named because the discussions are private.

The CIRC, China Life and Ping An did not respond to requests for comment.

Chinese insurers can invest up to 15 percent of their assets overseas.

A sharp drop in the yuan, low interest rates and sluggish stock markets have sent firms including Ping An, China Life and Anbang Insurance Group hunting for assets from the United States to Japan.

Those overseas manoeuvres took a hit after China began tightening rules for taking capital outside the country, to stem a gradual slide in its foreign exchange reserves.

The CIRC plans to cut the 15 percent overseas investment threshold to low single-digits for firms that have weaker solvency ratios and face asset and liability mismatches, two of the people said.

Reporting by Sumeet Chatterjee and Julie Zhu, with additional
reporting by Raffaele Ruohong Huang in HONG KONG; editing by
Michelle Price and and Ian Geoghegan